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VERIZON REACHES FOR HIGHER SILICON VALLEY PROFILE WITH NORTH SAN JOSE LEASE

Silicon Valley Business Journal

June 3, 2014

By Nathan Donato-Weinstein

When Verizon Communications Inc. bought Intel Corp.'s Internet-enabled TV division in January, it was natural that the telecom giant would move its acquisition out of Intel's Santa Clara campus.

But Verizon's lease of more than 130,000 square feet at a prominent corner in North San Jose shows it's not just focused on warehousing a business unit. The deal, for two buildings at Bixby Land Company's "THE Campus" (yes, "THE" is capitalized) provides elbow room for up to 750 employees.

Filling it all would represent a significant increase from the 300 to 400 staff Verizon currently counts in Silicon Valley, and is a signal that New York City-based Verizon has big plans in the region — especially when it comes to video.

"We want to really build the product-development and the product-management skill set in the company from a pure engineering perspective, and particularly from the Silicon Valley talent base," Wallace Colyer, vice president of new product development for Verizon, told me in a phone interview today.

"The goal is to have a large enough facility where we can build a real mass of engineering talent, and do that in a way where it can grow in a Silicon Valley culture," he said.

The deal is yet another example of a tech tenant upsizing its office space in hopes of attracting Silicon Valley's most in-demand resource — engineering talent. Last week, the big deal was Ericsson, which leased more than 400,000 square feet in Santa Clara and announced plans to grow its workforce there. Walmart is also in a big space-grab phase in Sunnyvale.

The deal comes after two recent key milestones for Verizon: The acquisition of Intel Media, which had developed — but not yet commercialized — a streaming TV service called OnCue, and Verizon's buy-out of Vodafone's 45 percent stake in Verizon Wireless.

Verizon's new San Jose property will house the OnCue team and members of Verizon's "New Product Development Group," a unit set up after the Vodafone deal and tasked with developing new products across all of Verizon's business lines — wireless, wireline and enterprise. It will also house staff for Verizon's expanding Verizon Ventures, the company's venture capital arm.

Verizon reported $30.8 billion in revenue in the first quarter, a 4.8 percent increase over the year earlier. It is the No. 1 wireless carrier in the U.S., ahead of No. 2 AT&T, according to Firece Wireless.

Video and software at center of carrier trendsThe emphasis at the San Jose campus at 375 W. Trimble Road will be on building video-related products, Colyer said. Video is a large and growing segment of the mobile market, and analysts also saw the OnCue acquisition as a way to boost Verizon's Fios fiber-optic system, which is a player in the Northeast United States but not nationwide.

"We're going to have a major center for Verizon's consumer video efforts in Silicon Valley, helping to drive the technology of Verizon's consumer video businesses," Colyer said.

Jan Dawson, chief analyst at Jackdaw, an industry research firm, said the focus on Silicon Valley reflects significant shifts in the way carriers such as Verizon approach innovation.

"The carrier world is going more toward software," Dawson said. "It used to be a carrier like Verizon would buy network infrastructure from vendors, and that would drive all the innovation. But carriers are being driven more toward a model where it's much more software-driven."

Dawson added: "Their innovation is now a lot of stuff around applications, either on smartphones and tablets or your TV. And if you're going to do that, you're going to want to hire the best people, and that means being in the Valley."

Another score for 'Renovation Row'Verizon plans to build out a "collaborative" environment for staff at the new campus, "without a lot of tight packing," Colyer said.

He said the company was attracted to the project's location primarily because most workers already lived in the area.

"It also has a great outdoor space and a lot of room for us to build a fairly innovative, collaborative space so we can bring this diverse set of teams together," he said.

Verizon's lease is at least the third significant deal in recent weeks along the Orchard Parkway corridor of north San Jose, which we and others have started calling Renovation Row for the many outdated buildings that investors have brought back to life and marketed to tech tenants.

The 10-year Verizon lease, which I have reported was in the works several times in recent weeks, is another feather in the cap for landlord Bixby Land Co., which has focused on buying such properties in need of TLC. It previously landed Infoblox and Nimble Storage in other rehab plays. (Bixby flipped the Infoblox campus last spring for $42 million.) Bixby declined to release terms of the deal, but an industry source told me Verizon is paying an initial rent of about $2.30 a foot per month triple-net, with a $35 per foot tenant-improvement allowance.

"I think our success is the result of the fact that when we develop these properties, we tend to spend more money than many of our competitors," said Bill Halford, CEO of Irvine-based Bixby. "What we're seeing is the tenants are more focused on better product than they are on a better price. I think in Silicon Valley there's a disproportionate number of companies that want the best product."

Halford said he sees the "path of progress" continuing to push tenants into areas of Santa Clara and North San Jose as pricing increases in more core markets. That is good news for Bixby, as the company picked up Lake Park Business Center earlier this year in Santa Clara for roughly $110 million, with plans to sink another $20 million into renovations.

"We continue to look for opportunities, but it is increasingly hard to find those at a low enough basis to where you can improve it in a market area you like," Halford said. "I can get a low basis in Milpitas, but it's not a market I'm bullish about. In markets I am bullish about farther north, lots of (investors) want to be in those."